Nirmal Bang is bullish on KEC International and has recommended buy rating on the stock with a target of Rs 79 in its January 31, 2013 research report.

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Nirmal Bang is bullish on KEC International and has recommended buy rating on the stock with a target of Rs 79 in its January 31, 2013 research report.

“Driven by a sharp jump in order execution in the power systems segment, KEC International (KEC) posted a healthy 23.1% YoY revenue growth at Rs17.9bn, in line with our/Bloomberg consensus estimates, respectively. The execution of low-margin contracts in new business segments like power systems, railways and water - taken up as an entry-level strategy to achieve pre-qualification criteria - was expected to keep profitability softer for the quarter. Consequently, EBITDA/PAT declined by 8.7%/21.2%, respectively, YoY. Also, impacted by a forex loss of Rs60mn, EBITDA was 2.7% below our estimate, while higher interest costs led PAT to be 14.4% lower compared to our estimate. Consequently, we have cut our EBITDA/PAT estimates marginally by 2.9%/6.8%, respectively, for FY13E. However, the company has already commenced its journey towards recovery in margins as operating profit was up by 70bps QoQ (100bps excluding forex loss) in 3QFY13. We have retained our Buy rating on the stock with a target price of Rs79 based on 8xFY14E EPS.”

“Power systems segment’s revenue grew 216% YoY at Rs3.8bn, accounting for 21.3% of total revenue versus 8.3% in 3QFY12, driving overall top-line growth. Revenue growth of the power transmission segment was soft at 2.3% YoY, at Rs11.5bn, leading to its share in total revenue to fall from 77.2% in 3QFY12 to 64.1%. Despite higher order execution in the zero-margin power systems segment and lower revenue booking in the high-margin power transmission segment (Exhibit 6), KEC witnessed a 70bps QoQ recovery in operating margin at 5.8% (6.1% excluding forex loss). This augurs well for sustained recovery in margin as 73% of the order backlog belongs to the power transmission segment, which will be predominantly executed in FY14E, while the margins in new business segments will also inch up owing to better operating leverage. We expect the company to register 100bps/60bps YoY rise in operating margin for FY14E/FY15E, respectively.”

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